Calendar Spreads are defined risk trades with positive Vega and positive Theta (time decay). We generally place them in environments like the current one (in which implied volatility (IV) is low). Is that the smart thing to do?
Our rule of thumb for Calendars (low IV strategy), is to look for low IV, low implied volatility rank (IVR) (below 35%), and a relatively flat Volatility Skew between the front month and back month we use. Our study was conducted in SPY (S&P 500 ETF) covering a time period of 2005 to present (2,665 observations). We chose the front month options closest to 45 days to expiration (DTE). We sold the at-the-money (ATM) Put and bought the next monthly expiration ATM Put. We placed these Put Calendar Spreads in all market conditions and also compared those trades to periods where the VIX was below 15. All trades were held until the front month option expired.
A table of the results comparing Calendar Spreads in all environments and when the VIX was below 15 was displayed. The table included the percentage profitable at expiration, average P/L per trade and biggest loss. A second table examined just the trades when the VIX was below 15. The comparisons were holding the Calendar Spreads to expiration, managing at 25% of the initial debit (or held to expiration), and managed at 50% of debit (or held to expiration).
For more on Calendar Spreads see:
Market Measures from May 29, 2014: "Time Plays"
Best Practices from April 27, 2015: “Calendar Spreads”
Market Measures from December 30, 2015: "Calendar Spreads | A Hedged Strategy"
Market Measures from February 5, 2016: "Crude Oil Calendar Spreads"
Watch this “Market Measures” with Tom Sosnoff and Tony Battista for the important takeaways and our study results on using Calendar Spreads in different volatility environments and managing trades early.
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